Weakening Yuan: Beijing's Dilemma as Trump's Tariff Threats Loom

Alright, let's talk about the elephant in the room. The yuan is weakening, and Beijing is feeling the heat. With Trump's return on the horizon, tariff worries are fueling the fire. So, what's the deal with this depreciating currency, and how is it testing Beijing's resolve?

First things first, a weaker yuan makes Chinese exports cheaper for foreign buyers. This is great news for companies like Chuwi, a consumer electronics manufacturer, which saw a 5-percent fall in the yuan equate to a 5-point increase in profit margins. Similarly, Gouba Trading Company found that a depreciating yuan gave its garments and daily necessities a greater price advantage in Japan, boosting overseas sales.



But hold your horses, because a depreciating yuan isn't all sunshine and roses. It also increases the cost of importing raw materials and energy, which can lead to higher production costs for domestic industries. Yang Lihua, the general manager of Chuwi, noted that rising bulk raw material prices impacted the company's business operations. Moreover, China's imports of crude oil and natural gas increased by 10.5 percent and 12.3 percent year on year in 2024, respectively, indicating higher import costs due to the yuan's depreciation.



Now, let's talk about the elephant in the room: Trump's tariff threats. A significant depreciation of the yuan could lead to countermeasures from trading partners, such as currency interventions or tariffs, to protect their own industries. The Trump administration has already laid out an activist trade policy agenda focused on increasing US tariffs, which could strain trade relations with China and other countries.

So, what's Beijing to do? The People's Bank of China (PBOC) has been using a counter-cyclical factor to maintain the relative stability of the yuan, pushing back against significant depreciation pressure. However, the PBOC's impact on the USDCNY pair has turned neutral for now, as the depreciation pressure faded quickly in August. The PBOC is comfortable with where USDCNY is trading and is even seeking out research on the impact of a stronger CNY.

But here's the thing: the PBOC faces a challenge in balancing yuan stability and economic growth amidst Trump's tariff threats. While a weaker yuan can boost exports, it can also increase import costs, leading to higher production costs and imported inflation. The PBOC must walk a fine line between maintaining yuan stability and ensuring economic growth doesn't stall.

In conclusion, a weakening yuan is testing Beijing's resolve as Trump's return fuels tariff worries. While a depreciating yuan can enhance export competitiveness, it can also increase import costs and lead to countermeasures from trading partners. The PBOC must navigate this delicate balance to maintain yuan stability and support economic growth. Keep an eye on the yuan and its impact on China's trade relations with the US and other countries, as the situation continues to unfold.